The Evolution Of The VAR Market

With the end of the first decade of the 21st century, it seems appropriate to ask that variant of Ronald Reagan’s famous campaign line, and examine how being a VAR has changed in the past 10 years and how solution providers are faring today.

“It hasn’t got any easier,” laughs Chris Pyle, president and CEO of Champion Solutions Group, a Boca Raton, Fla.-based solution provider and IT infrastructure consulting company. “You have to be a lot smarter. You have to be a services-led, vertically oriented company so you can provide value to your customers.”

/**/ /**/That’s a pretty good summation. The old days of being an IT “reseller” are largely done and gone. Sure, some VARs still make money on the margins (of products, that is). But more than ever, solution providers today make their living from value-added services, from IT implementation and break-fix support, to managed services, to business process consulting, to deep expertise in specific technologies and/or vertical industries.

Solution providers today must lead with services “as the key ingredient to make it all work. The hardware and software are secondary. You really have to be a specialist and a thought leader,” Pyle said. “It’s not price and availability of the product.”

NEXT: Everything Channel's Survey Says

There are a number of forces at work pushing solution providers to focus more on services and less on IT product margins. Commoditization has squeezed margins on many hardware products to the point of nonexistence.

The importance of services is evident in statistics from a 2009 survey of North American solution providers conducted by Everything Channel research. Services, including consulting, managed services and break/fix support, accounted for 51.8 percent of the revenue stream for solution providers in 2008, a number VARs expected to grow to 53.7 percent this year.

During that same time frame, hardware sales declined from 26.5 percent of solution provider revenue to an expected 24.3 percent this year. Software is a slightly larger component of VARs’ businesses, inching up from 21.7 percent of their total sales to an anticipated 22.0 percent in 2010.

Imagine how much that has changed since 2000. Solution provider Prolifics is representative of the direction in which the channel has been heading. The New York-based company, a major IBM partner, has always focused more on services, with margins from selling IT hardware and software accounting for a small part of its revenue and profit stream, said Michael Chadwick, executive vice president of business development.

While every deal Prolifics wins generally includes at least three or four IBM software brands, “I don’t go out and try to sell Tivoli,” he said, naming one IBM product. “I never want to try to just sell a product, even though we sell a lot of products.”

IT manufacturers and software developers have been pushing their partners in recent years to add more value through services and their expertise. Chadwick pointed to IBM’s requirement that VAR sales and technical staff be certified in the IBM products they resell. (Unveiled in February 2009, that requirement became effective early this year.) That, Chadwick argued, is indicative of IBM’s desire that channel partners build value-added services around IBM products, not just resell them for the profit margins.

“IBM is shutting those people out unless they can deliver the services,” he said of partners who remain focused on reselling. “I think those partners will fail.”

IBM isn’t alone in asking more from its channel partners. Oracle is offering its partners the opportunity to become certified in specific product and vertical industry “specializations” and so add more value to its products. (The certifications are encouraged, but not required unless a partner wants to achieve Platinum status.) Microsoft is requiring its resellers to become certified in “solution competencies” such as desktop systems, virtualization, and security and identity management.

To make up for reduced hardware profit margins, Pyle said solution providers must be “a master” at navigating ever-shifting prices, margins and rebates offered by vendors and to take advantage of opportunities when they come along.

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Even the way VARs sell today is different from 10 years ago. Back then the job of selling consisted largely of convincing IT executives that a new product would improve productivity. Today, Pyle said, with a greater number of people savvy about IT, the sales pitch has to offer benefits to a wider audience.

Some solution providers also sense a reduction in conflict between channel partners and the hardware manufacturers and software developers they work with. While VAR-vendor relations still have their ups and downs -- witness the 2008 row between Symantec and its channel partners over the security software company’s plans to sell directly to hundreds of large customers -- executives at several solution providers say the overall trend has been toward more harmonious relations.

“I would say it was a more adversarial business back then,” said Chadwick, referring to VAR-vendor relationships around the turn of the 21st century. (Chadwick has been with Prolifics since 1991.) “In that perspective, it’s changed drastically.”

“It’s much more of a partnership model, a symbiotic relationship,” agreed Jeffrey Davis, president and CEO of Perficient, a St. Louis-based solution provider that works with IBM, Microsoft, TIBCO, Oracle and EMC, among other vendors. Davis, who has been at Perficient for 10 years and has worked in the IT industry for 15 years, said he believes vendors today better understand the value of the channel.

A decade ago, some vendors thought solution providers cannibalized sales that should be theirs, Chadwick said. He pointed to middleware developer BEA Systems, which Prolifics worked with before Oracle acquired it in 2008, as one such vendor that was difficult to work with. “Ten years ago, vendors were grabbing for every dollar they could get,” he said.

But that’s been changing. Chadwick pointed to IBM, which he said has shifted from having a huge direct sales force that sometimes clashed with channel partners, to a smaller sales force that’s more open to working with the channel. One reason for the change is that a number of vendors have pulled back from offering professional services that created conflict with all kinds of solution providers, from small resellers to large systems integrators, Davis said. He pointed to Oracle, which has all but exited the professional services business because of the friction it created with channel partners.

One thing that hasn’t really changed is the role of trusted adviser that solution providers played back then -- and continue to fill today. The IT marketplace is no less confusing and chaotic than it was 10 years ago. That poses challenges for VARs. But it also means businesses are just as reliant on solution providers now as they were then. Said Pyle: “The VAR has to take charge and be willing to change constantly.”